In the Matter of Blockchain Credit Partners d/b/a DeFi Money Market et al. (“DeFi Money Market”) is an example of a high-risk business model in the cryptocurrency and blockchain. As a result, the SEC filed a civil complaint in June 2020 alleging that DeFi Money Market and its operators had violated numerous securities laws including the registration, antifraud, and proxy-solicitation provisions of the federal securities laws.
In this article, we’ll discuss the risks associated with DeFi Money Market and its potential impact on the global cryptocurrency and blockchain markets.
In the Matter of Blockchain Credit Partners d/b/a DeFi Money Market et al.
Blockchain Credit Partners d/b/a DeFi Money Market (“BCP/DMM”) is a private fund that uses blockchain technology to invest its funds into digital assets, including cryptocurrencies, tokens and other similar instruments. BCP/DMM is overseen by the U.S. Securities and Exchange Commission (SEC).
BCP/DMM offers investors access to a wide range of cryptocurrency related products, services and investments. These include an online trading platform that enables investors to open trading accounts and trade digital assets on various blockchain networks with one another; an automated portfolio building platform for personal portfolios that make investing in digital assets easier; safe storage solutions for digital assets; venture capital investments for early stage blockchain-related projects; access to sophisticated trading tools and data analysis provided through the DMM Crypto Oracle; and consultative advice from experienced professionals who specialise in digital asset investments.
In addition, BCP/DMM offers services designed specifically to help protect investor returns, such as fraud detection systems, cold storage solutions and secure operational procedures. It also has implemented strong customer authentication protocols to ensure the safety of users’ funds when engaging with its products and services. However, despite these protections, any investment in cryptocurrency carries certain risks due to factors like volatility of the markets involved or potential security breaches at third-party exchanges. In addition, investors should be aware that while they may have some protection if they lose money due to market changes or fraudulent transactions committed by parties other than BCP/DMM itself, it may still be difficult for them to recover their losses in some jurisdictions due to limited legal recourse available against those other parties or entities.
Overview of the SEC’s Complaint
The SEC (Securities and Exchange Commission) has recently filed a complaint against Blockchain Credit Partners and its affiliates, also doing business as DeFi Money Market (“DeFi Money Market”) for alleged violations of the federal securities laws.
This complaint will look into the risks associated with investing in DeFi Money Market’s products and services, which are claimed to offer high-yield returns and access to cryptocurrency-related services.
Alleged violations of the federal securities laws
The Securities and Exchange Commission (SEC) charged Blockchain Credit Partners LLC d/b/a DeFi Money Market (BCP) and its principal, Lawrence Lunn, with violations of the federal securities laws for allegedly running a fraudulent unregistered offering of digital asset securities.
According to the SEC’s complaint filed in federal court in Manhattan, from May 2017 through at least August 2020, BCP used a website to solicit investors worldwide to join a “DeFi Money Market.” In addition, the SEC alleged that BCP misled investors about their ability to protect their funds by stating that customer funds were held in an FDIC-insured depository and falsely guaranteeing customers a 5% return on their investments. Instead, according to the complaint, BCP was investing the funds primarily in cryptocurrency assets like ETH and BAT subject to significant price swings and no insurance protection. The SEC also alleged that BCP misappropriated millions of dollars of investor money for Lunn’s personal use instead of operating its promised Digital Asset Lending Platform or investing customer funds as promised.
The SEC’s complaint alleges violations of Sections 5(a), 5(c), and 17(a)(2) and (3) of the Securities Act of 1933, as well as Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks permanent injunctions against future violations by both defendants, disgorgement plus interest from their ill-gotten gains with prejudgment interest, civil penalties against both defendants and other potentially appropriate relief.
Alleged fraudulent activities
The U.S. Securities and Exchange Commission (SEC) has lodged a complaint against Blockchain Credit Partners, LLC d/b/a DeFi Money Market and three of its executives for allegedly engaging in fraudulent activities relating to the sale of digital asset security tokens.
According to the SEC, the defendants have raised more than $30 million from investors by offering unregistered securities through their DeFi Money Market platform. In addition, the complaint alleges that they failed to accurately disclose information related to risks associated with investing in these securities, including liquidity risk and pricing volatility, as well as risks associated with the company’s use of investor funds, including transfers without authorization or proper disclosure.
Furthermore, it is alleged that the defendants made material misrepresentations regarding the safety of investor funds and withheld truthful information about potential losses and fees associated with their token sales.
The SEC is seeking restitution for defrauded investors, civil penalties, disgorgement of ill-gotten gains and other relief as appropriate under the law.
Risks Associated with DeFi Money Market
Regarding Blockchain Credit Partners d/b/a DeFi Money Market et al., the potential risks associated with investing in the DeFi Money Market have been scrutinised.
With its non-traditional investment structure, investors may be uncertain of the potential risks they might face when deciding to invest in the DeFi Money Market.
In this article, we will be exploring the potential risks associated with investing in this market.
Lack of regulatory oversight
The lack of regulatory oversight in the DeFi Money Market presents a major risk to users and investors. While many innovative products are available in the DeFi Money Market, these products have not been subject to regulatory oversight or enforcement measures. As a result, these products may have structural flaws that create unforeseen risks, thus decreasing investor confidence in the underlying security. Additionally, the lack of regulatory guidance can impede the rapid innovation necessary for this highly competitive space.
Other risks associated with DeFi money markets can include:
- Liquidity issues caused by illiquid underlying assets or a market too small to support trading activity.
- Counterparty risk from reliance on other parties to settle transactions.
- Potential spread of fraud or manipulation through an unregulated peer-to-peer network.
Moreover, because most of the technology used in these financing mechanisms is open source unregulated computer code written by technicians, there could be errors in code that could present a risk to users and investors alike. Finally, as with traditional financing methods, economic downturns or geopolitical events can significantly affect returns on investments made through DeFi money markets.
Lack of transparency
One of the key risks associated with DeFi Money Market, as delineated in the Matter of Blockchain Credit Partners d/b/a DeFi Money Market et al., is the lack of transparency.
DeFi Money Market’s operations are based on a business model of automated investment and lending transactions that utilise deliberately obscure and increasingly complex trading platforms, making it challenging for investors to understand and assess their investments. Additionally, there is a lack of transparency regarding the underlying assets backing investments offered through its platform.
This lack of transparency fails to provide investors with an accurate assessment of their return on investment and the level of risk associated with its offerings. Lastly, due to its highly technical nature and restricted access to related financial information, there is limited disclosure for investors concerning how DeFi Money Market is utilising their funds.
High risk of capital loss
Investing in the Decentralised Finance (DeFi) Money Market comes with a high risk of capital loss. DeFi money market products are highly complicated and generally lack transparency, making them difficult to assess for their true value. In addition, many DeFi money markets rely on sophisticated technologies, automation and algorithmic trading, which can expose you to unexpected changes in market conditions that may result in major capital losses. Investments can be subject to sharp swings in price or valuation due to changes in the expected profitability of individual business operations or decisions by third-party actors or market-wide events, among other factors.
Additionally, fraud poses heightened risks, as many DeFi Money Market’s owners and operators lack sufficient experience with distributed ledger technology (DLT), decentralised governance protocols and automated trading algorithms. Finally, illiquidity is also a potential issue depending on investor activity at the time of investment. In this instance, investors may have difficulty selling their interests should they need cash suddenly or wish to close their positions early before receiving a full return on their investments.
As a result, it is important for all investors engaging with DeFi Money Markets to understand the risks associated with such investments before taking any money especially during volatile times such as now when cryptocurrency assets are subject to greater economic uncertainties. Accordingly, as part of its order In the Matter of Blockchain Credit Partners d/b/a DeFi Money Market et alSEC advises investors to review an issuer’s risk profile thoroughly before investing and routinely monitor activities related to such investments until complete satisfaction is attained.
Unpredictable price volatility
The so-called DeFi Money Market (or Decentralised Finance Money Market) offers investors the potential for high returns but carries a greater risk.
One of the main risks associated with DeFi money market investments is that they are subject to unpredictable price volatility. The prices of cryptocurrencies and tokens can be highly volatile and rise or fall rapidly, which can mean large losses if you get in at the wrong time. To manage this risk, it is important to have a comprehensive understanding of the underlying asset and do your research before investing any capital.
In addition to unpredictable price fluctuations, other inherent risks are associated with investing in the DeFi Money Market. As a relatively new technology, it still faces many unknowns that can lead to investor losses if not managed properly. For example, smart contracts can contain bugs which might make them vulnerable to malicious attacks or cause them to malfunction as intended. Additionally, there may be regulatory uncertainty surrounding certain tokens or projects which could result in unexpected restrictions or outright bans on certain products or services. Finally, liquidity within some markets may be low which could lead to reduced returns or increased risk when redeeming tokens from an exchange.
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